Stephen Castellano's  Instablog

This is a guest article provided to Ascendere Associates LLC (and distributed via Seeking Alpha) by a "Source close to the Hill."  

Aerospace and Defense is still a stock pickers’ sector, but post-election, you’ll see the most interesting variables found here. Secretary of Defense Robert Gates is leaving and he’s a budget hawk. His professional background is also in intelligence not defense. So with a more industry-friendly SECDEF, some defense programs may find a way to get off the chopping block and get funded.

A lot depends on Gates’ replacement who will be confirmed by more Republicans in the Senate. Along with a defense-industry bull as Secretary of Defense, the new SECDEF may bring his own people to trump the Office of the Secretary of Defense Acquisition, Technology, and Logistics (OSD AT&L). The current AT&L post is held by Ashton Carter, who is a former Harvard academic, clearly not from the defense world. OSD AT&L is where many of the policy decisions are made on major defense acquisition programs and Congressional Members from the “Gunbelt” would like to see more arms projects green-lighted. Under-Secretary Carter may feel the heat from Republicans and other defense hawks.

Look for growth in foreign arms sales to counteract White House cuts in the defense budget. The Administration has already approved large deals with Taiwan ($6 billion in F-16s and Patriot air defense systems in January) and most recently with Saudi Arabia. Big boys Lockheed Martin (LMT), Boeing (BA), and Raytheon (RTN) enjoyed a $60 billion windfall while the Saudis received F-15s along with Apache Longbow and Blackhawk helicopters.

If the GOP takes the House, Rep. Buck McKeon (R-CA) is due to get the gavel in House Armed Services. He’s a straight, squeaky-clean, and no-nonsense guy so expect fiscal prudence. However, he’s also from the California Gunbelt and will fight for his turf. If Carly Fiorina wins the Senate in California and gets rid of mega-dove Barbara Boxer (D-CA), Fiorina would very likely join Senate Armed Services and California defense and IT-related defense stocks could get a bump, especially those located in Long Beach and San Diego.

Perhaps the biggest surprise on the House Armed Services Committee is Chairman Ike Skelton (D-MO) fighting for his political life. Polling shows his race as a dead heat. Unbelievably, Armed Services Democrat number two in seniority, Rep. John Spratt (D-SC), could also lose. This would leave the Democrats with very little bench strength on the committee. With these potential losses and this year’s death of Rep. John Murtha who was  the reigning defense appropriations Godfather for decades, Democrats have seen a lot of their in-fighting ability against the Republicans evaporate.

If the GOP wins the Senate, Sen. John McCain (R-AZ) takes the gavel in Senate Armed Services.  This looks like a definite short play on Boeing. McCain hates Boeing with a cold, steely passion and watches every move they make. First, Boeing has completely failed its mission on the virtual border fence. After four years and $850 billion, the fence is still not complete and it still doesn’t work. McCain has been slowly trying to pound nails in Boeing’s coffin since at least 2002, when the Arizona senator helped bust the defense giant on an illegal tanker leasing deal. McCain has even been known to request flying on Airbus aircraft to symbolically stick it to Boeing.